Smart TaxesSmart Taxes

Quit getting tax refunds

Many Americans depend on tax refunds for savings. But you might be better off adjusting your withholding and opening a savings account.

By MSN Money Partner Jan 24, 2013 1:30PM

This post is by Kay Bell at


 © Getty ImagesLots of folks are grumbling about having to wait to file their taxes. Why? They get refunds.


That's no secret. Every tax filing season, the Internal Revenue Service notes that most taxpayers get refunds.


But the American Tax and Financial Center, a new undertaking by tax software giant TurboTax, has taken a closer look at this refund trend.


A federal tax refund is the largest lump sum of money received in a year by the typical American household, according to the Center. And based on 2011 and 2012 IRS data, it estimates that around $230 billion in federal tax refunds will be issued this year to American taxpayers.


They'll get this money, their money, eventually -- after the IRS finishes updating forms and its computer system to match the tax law changes Congress didn't approve until Jan. 1.

Because of that congressional tardiness, the IRS is processing returns, and issuing refunds, a bit later this year. And that could cause a lot of people a lot of problems.


Tax refunds, says the American Tax and Financial Center, are especially vital for U.S. households who live paycheck-to-paycheck and who depend on a tax refund to help cover the costs of everyday living.


Forty-two percent of early tax filers plan to use their refund to pay down debt and cover the costs of rent, food and utilities, according to the Center's analysis.


Adjust withholding instead


As longtime readers of know, I am not a fan of tax refunds. I think it's better to have your money in hand throughout the year via proper payroll tax withholding.


But I understand that a refund is an easy, forced savings account. And with interest rates on traditional savings accounts and CDs at just fractional percentage points (thanks for nothing, literally, Federal Reserve!), you're not losing any earnings right now by letting Uncle Sam be your banker.


But you are losing access to your refund money because the IRS can't get it to you as quickly as you'd like.


So just think about adjusting your withholding this tax year. That way a bit of your usual refund will show up in each of your 2013 paychecks.


Sure, Congress might finally get its act together and tax filing this time next year may be on schedule. But we are talking about Congress.


If you're afraid you'll just spend that money that you usually get as a refund, there's a way to save yourself from yourself. Open a savings account and have the amount that you're sending to the IRS via payroll withholding directly deposited in your own account instead.


Since it won't show up in your pay, you won't be tempted to spend it. And I have faith that you can leave that savings account alone until you really need to tap it.


More from and MSN Money:


Jan 24, 2013 4:45PM
Unfortunately in the state of  Taxifornia, the closer you get to even on the federal taxes( not owing or getting a refund ) the more you owe the state.

Jan 24, 2013 4:15PM

At least in my state if i have my federal taxes really close then that means that i will have to pay into the state.  My income also fluctuates which makes it even harder to make sure that i am balanced in my taxes.  Also for me getting the tax refund when i do helps me with my finances since that time of year is usually my slow period.

As far as putting more into a 401k, who knows if that is actually going to make any money?  I do have money put into a savings account each month.  it is not a lot but it does add up.

We will see how I come out this year.  I did lower the amount that i am putting in for taxes so i should be closer this year.


Jan 24, 2013 3:59PM

always better to owe the governmant then them owing you.  remember the IOUs from the states when they over spent.  after it is my money not theirs, why let them keep it until they give you a refund. use the money for yourself, invest and save  then you are always ahead of the game. especially this year when they will hold back refunds if you dont get healthcare they want you to have. they wont return you money  but they also dont have a way to collect if you dont owe them



Jan 24, 2013 3:32PM
Better yet to under withhold & get an interest free loan from the government. Just be sure you don't owe enough to have to pay extra. This is what I have always done but the puny interest you get now hardly makes it worthwhile.
Jan 24, 2013 3:31PM

I intentionaly withhold at the 0 dependent single rate and then file married with my wife and I as dependents just to get a large refund.

If we were to get lets say $25 dollars a week extra on the paycheck it would just get p!ssed away in our day to day lives.

Even if we were to put it in a savings account the intrest doesn't amount to sh!t and the sneaky fees the banks screw you with would make it a loosing game.


Jan 24, 2013 3:30PM

Time worn, but sage advice.

Go one step further:

Use the proceeds from your with-holding change to start or bump-up a 401k!

It's double good... The 401k contributions reduce your AGI (lowers your taxable income).  You might not nail-it first year unless you are tax savvy, but if you use soft-ware or pay a professional it should be a snap.


Next to a small business and home-ownership, the 401k is the best thing going for the 'little guy'...


Do yourself a big favor and look into this.  Take control of your finances, America!


Best of Luck...



Jan 24, 2013 3:29PM
On the healthy side, taxpayers see their withholdings as a yearly savings account that is safe and sound.  Together with child tax credits, EIC, and other credits that survived the "fiscal cliff" the refund is truly a lump sum that solves many problems.  The appeal of a big refund is well founded and very-well deserved by millions of Americans who pitched into the federal coffers for a whole year, paid their  tax liability, and at the end have some change back.
Jan 24, 2013 3:13PM
It is hard to change withholding for this year when I don't know exactly how the tax changes will affect me.
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